The Internal Revenue Service (IRS) issued Notice 2013-29 to provide guidance on eligibility for the production tax credit (PTC) and the investment tax credit (ITC). Under the most recent extension of the PTC and ITC, enacted by Congress on January 1, 2013, a renewable energy facility must begin construction before January 1, 2014 to be eligible for the PTC or ITC.  The IRS’ Notice largely follows the guidance that Treasury provided with respect to Section 1603 grants and provides that a taxpayer may establish that construction has begun either by demonstrating that physical work of a significant nature has begun or by satisfying a five percent safe harbor.  Key differences between the Section 1603 Guidance and the IRS’ Notice on the PTC and ITC are highlighted below.

Under the IRS’ Notice, physical work of a significant nature must be with respect to tangible property that is integral to the facility.  Thus, property integral to the production of electricity is included but not property used for the transmission of electricity.  Power conditioning equipment, such as a transformer, is an integral part of the facility.

Either on-site or off-site work can be sufficient to demonstrate the beginning of construction.  If work is performed off-site, the work can be performed either by the taxpayer or by another person for the taxpayer pursuant to a binding written contract.  A contract is binding only if it is enforceable under local law against the taxpayer (or a predecessor), and the contract does not limit damages to a specified amount.  This definition is a departure from the 1603 Guidance, which determined that a contract is binding so long as the liquidated damages provision in the contract does not limit damages to less than five percent of the total contract price.

A taxpayer must maintain a continuous program of construction of a significant nature. The IRS’ Notice lists detailed examples, not provided in the 1603 Guidance, of allowable disruptions that are beyond the control of the taxpayer, including: severe weather, licensing and permitting delays, delays requested in writing by a government agency, financing delays of less than six months, and supply shortages.p>

Alternatively, like the 1603 Guidance, the IRS’ Notice includes a safe harbor that provides eligibility for the PTC or ITC if the taxpayer pays or incurs five percent or more of the total costs of the facility.  All costs properly included in the depreciable basis of the facility are taken into account.  However, the cost of land or any property not integral to the facility is not included. 

Unlike the 1603 Guidance, the IRS’ Notice imposes a continuous efforts requirement for the safe harbor and includes a taxpayer favorable provision related to cost overruns.  Facts and circumstances indicating continuous efforts include paying or incurring additional amounts included in the total cost of the facility, obtaining permits, and entering into binding written contracts for components or future work.  With respect to a single project comprised of multiple facilities, the IRS’ Notice provides that if the actual cost of the project exceeds the anticipated cost such that the safe harbor amount is less than five percent of the actual total costs, the safe harbor is not fully satisfied.  However, the PTC or ITC may be claimed with respect to some, but not all, of the individual facilities whose total costs are not more than 20 times greater than the amount the taxpayer paid or incurred before January 1, 2014.